Labour market regulations and workforce adaptability


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8.10  What steps are being taken to ensure that labour market regulations support an adaptable workforce and maintain the ability of enterprises to modify their operations and investment planning?

Rationale for the question

Labour regulation that allows for efficient and flexible operations helps foster an attractive investment climate. The ability to respond efficiently to market forces is essential to staying competitive. Companies need to be able to modify quickly their operations and investment practices to be responsive to changes in demand and developments in technology.

The main policy issue is how to combine companies’ need for adaptability with individuals’ need for security. Question 8.9 focused on one aspect of this: worker protection policies that ease the difficulties faced by workers displaced during transition periods, an important counterbalance to policies that make hiring and firing easier. Question 8.10 focuses on another aspect: regulations that favour smooth workforce adjustments without losing sight of the need to provide people with security.


Key considerations

Efficient job protection regulation Increasing the efficiency and predictability of job protection regulation is an essential first step toward making it possible for businesses to operate more effectively. This means creating rules that are :

  • Clear. Laws and regulations should be easily comprehensible and unambiguous. Confusion over a law’s requirements can lead to divergent interpretations, reducing compliance and possibly leading to costly legal disputes with unpredictable outcomes.

  • Not overly strict. Protecting workers from unfair firing – such as on the basis of gender, ethnicity, age or other forms of unfair discrimination – should not imply that they cannot be dismissed for economic reasons.

  • With minimal red tape. Minimising red tape increases efficiency by making compliance with procedures less costly and time-consuming. It also makes outcomes more predictable by decreasing the likelihood of administrative error and disagreement over proper procedures. Laws or regulations should be streamlined by removing unnecessary filing, approval and notification requirements, which can slow companies’ operations and generate additional expense, and by reducing the number of government offices involved in the decision – which will also reduce the scope for bribery.

  • And with minimal judicial uncertainty. Reducing judicial uncertainty increases efficiency by avoiding legal disputes which consume both time and money. Keeping laws and regulations clear, their requirements reasonable, and their compliance procedures streamlined decreases the chances of ending up in court. Eliminating superfluous approval requirements by judicial bodies also reduces uncertainty.

Flexicurity. Governments should focus their interventions on providing temporary income support and re-employment services to assist unemployed workers, while reducing legislative and regulatory obstacles to economic firing. This combination, called “flexicurity”, gives employers the flexibility they need to adapt and modify operations smoothly, while providing individuals with valuable protections.

Poorer countries with limited resources and organisational capacity may find some flexicurity measures a challenge to implement. Question 8.9 explores various income support and re-employment service alternatives, such as pooling risk through employment insurance and encouraging employers to create pre-funded severance pay accounts. Other options include reasonable dismissal notice requirements. If a country chooses to adopt a law requiring minimum notice before dismissal, the length of this notice should depend on individuals’ need for assistance in light of the other types of government support available and on how burdensome the requirement will be on companies.

Flexible work schedules. Flexible work arrangements help to ensure an adaptable work force. Labour legislation that hinders the creation, through the mutual accord of employers and employees, of flexible work-time schedules should be eliminated. The law should allow for part-time work, fixed-term employment contracts, and flexible hours. These can create more employment options for companies, help people reconcile work and family life, and have other benefits such as helping older workers shift progressively from work to retirement.

At the same time, part-time and fixed-term employees should not receive inferior tax treatment or social security protections. The goal is to favour flexibility and give employers and employees more options, not to create a dual labour market, where some workers receive more benefits than others—a solution that can hurt labour market performance in the long run.

Consultation with a wide range of stakeholders. Labour market regulations should reflect the interests of employers and the entire workforce—employed and unemployed, union and non-union, formal and informal. When drafting new rules, governments should consult with a wide range of stakeholders, including those who can voice the interests of the unemployed and the disenfranchised.

Policy practices to scrutinise

Based on these considerations and good practices the PFI user should form an assessment of the flexibility and efficiency of a country’s labour laws and regulations. Key issues are the efficiency of economic dismissal laws and regulations, the degree to which they are combined with flexicurity-compatible protections, the degree of work schedule flexibility, and the range of stakeholders whose interests are represented.

  • Regarding economic dismissal laws and regulations the PFI user should consider:

    The clarity of economic dismissal laws and regulations. How straightforward and easily intelligible are the provisions? How likely are they to be subject to more than one interpretation due to vague or contradictory provisions?

    The barriers to economic dismissal under current laws and regulations. What standards must the employer meet to proceed with economic dismissals? Are dismissals permitted or prohibited under certain circumstances? Must employers consult or obtain prior approval from government or other bodies (e.g., labour inspectors, courts, union representatives)? Are employers required to respect certain priority rules for dismissal (e.g., first in last out)? What is the amount of notice and severance pay required by law? Must the employer provide proof to justify an economic dismissal and if so what (e.g., specific balance sheet requirements)? How difficult is it to meet this standard, and how likely there is to be disagreement over whether this standard has been met? It may be that larger companies or collective dismissals of more than a threshold number of workers are subject to additional requirements. If so, are all sets of requirements appropriate and sufficiently flexible?

    The administrative steps involved in economic dismissal. How many steps are involved in laying off employees for economic reasons and can any be removed? Is official approval required (which both slows down the process and makes the outcome less predictable)? Should more than one office be contacted? Are there any fees involved? How long does the entire process take? In countries where corruption is a problem, what is likely to be the additional cost incurred through paying bribes?

    The level of judicial uncertainty involved in economic dismissals. What is the likelihood of ending up in court over a dispute? What share of layoff disputes end up in court? To what extent do existing laws and regulations require rulings or approvals by courts, trade organisations or other governmental or quasi-judicial bodies? Judicial uncertainty implies that more layoffs may occur outside the law.

    The effectiveness of economic dismissal laws and regulations. In terms of compliance, how often is the law followed? How often it is circumvented or ignored? Low compliance could indicate weak enforcement due to inadequate government resources. But it may also signal rules that are difficult to enforce and which could be reformed to increase compliance levels. Low compliance may also signal rules that are in substance a poor fit, overly severe or simply impractical, and which need to be reformed more fundamentally. Where compliance is high, do economic dismissal laws and regulations achieve desired outcomes or do they have adverse side effects (e.g., resulting in excessive expense or administrative delay or making employers reluctant to hire when business is good for fear of difficulty dismissing when business is bad)?

  • Regarding flexicurity protections, has the country, within its means, successfully implemented laws, regulations and other programmes that provide income support and redeployment services to the unemployed, while reducing legislative and regulatory barriers to personnel restructuring? What types of support measures exist (e.g., direct financial support to the unemployed or other forms of unemployment insurance, severance pay from employers)? If so, how much is offered? How do these support measures relate to the existing barriers to economic dismissal? Is there a satisfactory equilibrium between low barriers to dismissal and meaningful support for individuals? Different countries may choose different formulas for striking this balance. What improvements are possible, keeping in mind that there are some programmes which, although effective, may not within the means of every country to implement?

  • Regarding flexible work schedules, what laws and regulations govern work schedules, including work-hour limitations and fixed-term and part-time work contracts? How well do they support an adaptable workforce by helping create flexible work schedules through the mutual agreement of employers and employees? Based on a review similar to that of economic dismissal laws, are such laws and regulations sufficiently clear, flexible, streamlined and ultimately effective? Regarding specifically fixed-term and part-time contracts:

    o Are there any limitations on contract lengths, number of renewals, and types of positions for which fixed-term or part-time contracts may apply? This is useful for evaluating flexibility. For example, if a fixed-term contract can last a maximum of only 24 months including renewals, this places a significant constraint on how it may be used.

    o Do those employed under fixed-term or part-time contracts receive equal tax treatment and social security protections? Where this is not the case, these types of contracts may be abusively used to withhold benefits from employees, rather than for their intended purpose of increasing flexibility.

    o Are fixed-term or part-time contracts used inappropriately to circumvent rigidities in other areas of employment law? For example, employers may try to hire workers using fixed-term contracts to avoid dealing with economic dismissal procedures for full-time workers. This may signal economic dismissal procedures that are overly restrictive, and may result in a two-tiered system where employees doing the same work enjoy very different protections.

  • Are the interests of any relevant stakeholders being neglected or under-represented through the current laws and regulations? Do current employment regulations protect more senior or full-time employees at the expense of newer employees, those with fixed-term contracts or the unemployed? Effective legislation should seek to reconcile employer and investor interests with those of the entire working age population.


The following resources support the PFI user needing additional information on labour market regulations that support an adaptable workforce and facilitate changes in operations and investment planning.

  • An OECD report on Boosting Jobs and Income: Policy Lessons from Reassessing the OECD Job Strategy discusses creative ways of preserving labour market dynamism while at the same time providing workers with a sufficient security. The report is divided into four pillars: macroeconomic policy, removing impediments to labour market participation and job-search, tackling labour- and product-market obstacles to labour demand, and facilitating the development of labour force skills and competencies. Recommendations include ways of facilitating the adoption of flexible working-time arrangements and promoting transitions to formal employment.

  • The OECD Employment Outlook is an annual publication focusing on a different labour topic each year concerning OECD countries – although much of the information is useful for policy-makers and reformers in non-member countries. For example, the 2006 Employment Outlook in chapter 2 examines the relationship between employment protection legislation and labour market flexibility. Chapter 3 of the 1999 edition discusses the impact of welfare systems and labour market programmes on participation and employment.

  • The World Bank’s Doing Business project ( seeks to provide objective measures of business regulations and their application in over 180 economies, with an eye to assessing the ease or difficulty of doing business in each economy. A section on Employing Workers includes information on fixed-term contracts, work-hour restrictions, various types of limitations on economic dismissals, and required severance pay and notice requirements. A Paying Taxes topic includes information on non-wage labour costs. The World Bank’s Doing Business Law Library features a free online collection of business laws and regulations, including labour and social security laws, many of them in the form of links to other websites where the texts of the laws are posted.

  • The International Labour Organization’s website ( features a wealth of labour-related resources, including several useful databases. The Natlex database is particularly useful. It provides listings of labour-related laws (and sometimes links to the full text of the law), including national labour and social security laws and information on types of contracts, work-hour restrictions, collective dismissal procedures, severance pay and social security.

  • The ILO website also features a Termination of Employment Legislation Digest which is a database of laws and regulations covering termination of employment procedures in over 77 countries. It includes Profiles of National Legislation, which are concise and user-friendly summaries of termination legislation organised by country. Each profile is broken down into sections such as “sources of regulation”, “scope of legislation”, “dismissal” and “severance pay”, and ends with links to sources of further information.

  • The World Bank provides guidelines for policymakers and reformers in the form of “toolkits” which are topic-specific handbooks giving practical advice and resources. The Labour Toolkit deals with labour issues in the context of infrastructure reform but gives labour policy advice that is generally helpful, including on severance pay, pensions and redeployment support.

  • In conjunction with a Labour Market Policy course that the World Bank Institute offers each year to assist policymakers with labour reform, the World Bank posts case studies, evaluations of existing labour market policies, background reading and useful exercises.


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